Foxconn plant so far not even big enough to qualify for state incentives

Trump touted it as the "eighth wonder of the world," but Foxconn hired just 156 employees last year.
Image: The logo of Foxconn, the trading name of Hon Hai Precision Industry, is seen on top of the company's building in Taipei
The logo of Foxconn, the trading name of Hon Hai Precision Industry, is seen on top of the company's building in Taipei, Taiwan March 30, 2018.Tyrone Siu / Reuters file

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/ Source: CNBC.com
By Scott Cohn, CNBC

The giant Foxconn manufacturing complex planned in Wisconsin is likely to continue falling short of the threshold required to begin receiving billions of dollars in state incentives, even after production begins next year.

“We understand what is going to be built and when it’s going to be finished — the first phase,” Gov. Tony Evers told CNBC, noting that his administration has now gotten “clarity” from the Taiwanese electronics manufacturer on its plans — which are much less ambitious than they were originally portrayed.

Evers spoke exclusively with CNBC in his State Capitol office in Madison on June 27, one week after paying his first visit to the construction site near Racine. The site visit was undisclosed to the public until now.

Under the deal negotiated by Evers’ predecessor, Gov. Scott Walker, Foxconn said it would build a $10 billion manufacturing complex that President Donald Trump called “the eighth wonder of the world” at a groundbreaking one year ago.

Since then, no factory has been built, but state and local governments already have spent tens of millions of dollars on land acquisition and road and utility improvements. The company only recently began laying the foundation for a vastly scaled-down manufacturing plant, more than a year behind schedule.

“In fact, I saw them pouring concrete the other day,” Evers said.

But the governor said the project’s initial phase will employ only about 1,500 people when production begins, which is currently scheduled for next May. That would be well short of the company’s previously announced plans to hire more than 1,800 people by the end of next year.

The company already has acknowledged that it no longer plans to produce giant glass panels for video displays at the plant, using so-called Generation 10.5 technology for which there are no facilities in the U.S. Instead, Foxconn will build a Generation 6 plant.

“They’re going to be making smaller items, probably tablets, glass for tablets and phones and things like that. Not the big TVs that they talked about initially,” Evers said.

Foxconn attributed the change to market forces. In addition, the larger displays would have required an advanced glass plant to be built nearby. The leading glass manufacturer, New York-based Corning, said it was unwilling to locate a new plant in Wisconsin without subsidies, but the state was already tapped out.

Foxconn’s agreement with the Wisconsin Economic Development Corp., the state’s business development arm, calls for the company to create the 13,000 jobs by 2032. The deal calls for the company to do its hiring in phases, meeting specific targets in order to qualify for subsidies of around $3 billion.

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The payments are part of a controversial package totaling more than $4 billion in incentives and other assistance the state agreed to in 2017, believed to be the largest such package ever offered to a foreign company in the U.S.

The company’s point person in Wisconsin told CNBC that its long-term goals for the project are unchanged.

“I talked to our corporate [team], and they have reiterated that we are committed to 13,000 jobs,” said Peter Buck, executive director of the Wisconsin Valley Science and Technology Park, which is what the company and the state have named the development.

The company already missed last year’s target of 260 employees. It hired only 156, which meant it forfeited $10 million in credits last year. The company has not said whether it will meet this year’s minimum of 520 employees to collect as much as $222 million. In 2020 the contract requires the company to create at least 1,820 jobs by year’s end in order to receive up to $270 million more in credits.

The disconnect between Foxconn’s initial promises and reality has been deeply controversial in Wisconsin and likely helped Evers, a Democrat, defeat Walker, a Republican, in last November’s election. As recently as April, Evers said the original deal with Foxconn was “no longer in play” and that his administration was renegotiating it at the company’s request.

The comments set off a flurry of activity, with Trump intervening and Foxconn’s then-chairman, Terry Gou, traveling to the White House and to Wisconsin on May 1 and 2 to smooth things over. Gou has since stepped down from the company to run for president of Taiwan in the January 2020 election.

In the interview with CNBC — Evers’ first public comments about the project since Gou’s visit — he said specifics of the contract were still under discussion, but the clarity he has received has made it more of an ongoing dialogue rather than a one-time renegotiation.

“That clarity is important to me. That transparency and accountability and protecting the taxpayers has always been a top priority,” Evers said.

His administration has hired a consultant with industry expertise to monitor the project and is in “constant conversation” with the company, Evers said.

“The natural outgrowth of that has been: ‘Let’s have some conversations around the quote-unquote deal, because it’s not going to be what that deal was set up on; it’s going to be something different,’” Evers said.

Backers of the deal, including WEDC Secretary and CEO Mark Hogan — a Walker appointee who has announced plans to step down later this year — say the experience thus far proves that the contract is functioning the way it was designed and is protecting the taxpayers.

“The contract works. They didn’t create the jobs. It’s a performance-based contract. They don’t get the tax credits. They understand that,” Hogan told CNBC.

But that does not address the taxpayer money that already has been spent on the project or the upheaval it has created on what was thousands of acres of rolling farmland 30 miles south of Milwaukee. Under the agreement, Racine County and the Village of Mount Pleasant — where the facility will be located — are on the hook for as much as $764 million whether Foxconn meets its hiring targets or not. As of the beginning of this year, nearly $200 million of that already had been paid out, mostly for land acquisition.

While Foxconn’s factory has yet to rise on the site, the area was still a beehive of activity when CNBC visited in June. Nearby Interstate 94 was a giant construction zone — it is being widened to eight lanes from six, a requirement from Foxconn when it was still planning a Generation 10.5 plant. Off the freeway, crews were building new roads, laying utility and drainage lines and moving tons of dirt. Orange construction signs pointed the way for “Wisconn Valley Trucks.”

The impact extends beyond the neighborhood. The Village of Mount Pleasant and Racine County both saw their credit ratings downgraded as a result of the money they are spending on the project.

In its Aug. 30 report downgrading Mount Pleasant’s bond rating to Aa3 from Aa2, Moody’s Investors Service said the move “largely reflects current and anticipated growth in the village’s direct debt burden and likely growth in its overlapping debt burden tied to borrowing in support of the Foxconn development.”

Village officials did not respond to CNBC’s request for comment, but Racine County Executive Jonathan Delagrave said the upfront costs are well worth the benefits Foxconn will provide in terms of infrastructure, health care and jobs.

“I think it’s been a huge, huge benefit, and there’s certainly been a good return on our investment already,” Delagrave told CNBC.

The ultimate cost-benefit analysis, of course, depends on what Foxconn ultimately builds at the site and whether it hires the numbers of people it has promised. Evers acknowledges the company’s commitment to expand beyond 1,500 employees, but he will not speculate beyond that.

“Well, we will take one step at a time,” he said. “We’ve learned that making sure that things are concrete and discreet and transparent takes some time, and we’re going to continue to do that.”